First, and as always, we hope you and your family had a wonderful holiday season and that your 2026 is off to a productive start!
After three consecutive years of double-digit market returns, we knew statistically that 2026 could prove to be a more challenging investment environment.
The volatility we are experiencing this week is yet another gentle reminder that market gains are not linear and often the best course of action is no action at all -reminding me of the quote by Thich Nhat Hanh (the Zen Master), “Don’t just do something, stand there”.
4th Quarter 2025 corporate earnings kicked off on January 13th and to date approximately 55% of S&P 500 companies have reported -with the past two weeks being the busiest. 77% of those companies have beaten earnings expectations, showing 8% revenue growth and 11.3% earnings per share growth.
The technology sector as a whole has reported earnings growth near 30% -with the Magnificent 7 (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, Tesla) responsible for 55% of that earnings growth. As we have mentioned in previous notes, the true driver of long-term stock appreciation is consistent revenue growth, EPS growth, and margin expansion.
As you know, our portfolio allocations hold sizable individual positions in the Mag 7 and despite reporting strong profits for the end of 2025, their 2026 capital expenditure (Cap Ex) projections of $630-$665 billion on Ai infrastructure stunned the market. To put this in perspective, that is more than the entire annual GDP of countries like Sweden or Thailand.
Late last year, a shift occurred that went from cheering cap ex spending to now one of concern on spending too much and when/what is the return on investment? This is the root cause for the market’s foul mood this week.
Are we concerned? No, at least not yet anyway. These companies are still largely paying for this cap ex out of their free cash flow -not debt. Remember, free cash flow is the money a company has left over after paying all its bills and servicing it’s debt payments. However, it does leave less money for share buybacks, dividend (increases) and a safety net in the event the economy slows. We do see this as necessary spend and there is no going back now that Ai has taken hold -make no mistake, it is the future.
In addition, Ai advancement is moving so fast that the market is having trouble deciphering who the winner and losers will be -with many software companies already being deemed losers as Ai agents such as Claude Cowork and Open Ai’s Frontier encroach on their SAAS turf. Only time will tell of course, but from a portfolio allocation perspective, diversification within sectors and industry is an effective hedge.
So, where do we see the market as a whole heading for 2026? S&P 500 Index year end targets range from Deutsche Bank’s 8,000 (highest) to Bank of America’s 7,100 (lowest) and everything in between. If we assume a middle range of 7,600 this implies a 10% index increase by year end.
Backing into this number, we take an S&P 500 multiple of 24.9 and a year end EPS of $305 (24.9 x $305) equals 7,594.50 or 7,600. This is assuming we have two fed rate cuts of .25% each, the economy maintains its non-recessionary stance and corporate earnings continue to grow as expected.
Looking ahead, the backdrop for stocks still remains favorable despite elevated valuations..but Ai scrutiny, deficit spending, and geopolitics remain key risks. We expect the new Fed Chair Kevin Warsh to be tested by markets, and midterm election years tend to be more volatile. We know there will be bouts of market volatility ahead but do not let it shake your confidence. It will not shake ours. We have plenty of cash in portfolios ready to be put to work in the coming months as opportunities present themselves.
As always, we wish you and your family a great Friday evening, and a wonderful weekend!
Please reach out to us with any questions or comments you may have regarding your specific situation.
Jaran C. Day, Chief Investment Officer
Griffin Dalrymple, CFP®, Chief Strategy Officer
Past performance is not indicative of future performance.
The views expressed represent the opinion of Opinicus and are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Opinicus’s view as of the time of these statements. Market performance cited is not indicative of portfolio performance experienced by portfolios Opinicus manages. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.